FCA reveals impact of pandemic on financial resilience

The Financial Conduct Authority has this morning published the results of its coronavirus financial resilience report, revealing the impact of the pandemic-induced economic downturn on firms’ solvency.

Between February (pre-lockdown) and May/June (during the impact of the first lockdown), firms across the sectors experienced significant change in their total amount of liquidity (defined as cash, committed facilities and other high-quality liquid assets). Three sectors saw an increase in liquidity between the two reporting periods. Retail investments (8%), retail lending (8%) and wholesale financial markets (83%). Seeing a decrease in available liquidity were insurance intermediaries and brokers (30%), payments and e-money (11%) and investment management (2%).

When asked whether they expected coronavirus to have a negative impact on their net income, 59% of respondents had said that they did. Of these, 72% expected the impact to be between 1% and 25%. 3% expected the impact to be 76%+ within the next three months of the survey being taken.

Conducted before the recent extension of the government’s furlough scheme, positive vaccine developments and the announcement of new rules and restrictions, the FCA’s study reflects a still evolving situation.

Sheldon Mills, executive director of consumers and competition said: "We are in an unprecedented -- and rapidly evolving -- situation. This survey is one of the ways we are continuing to monitor the potential impact of coronavirus on firms. A market downturn driven by the pandemic risks significant numbers of firms failing. At end of October we’ve identified there are 4,000 financial services firms with low financial resilience and at heightened risk of failure, though many will be able to bolster their resilience as and when economic conditions improve. These are predominantly small and medium-sized firms and approximately 30% have the potential to cause harm in failure."

According to the data, the payments and e-money sector has the lowest proportion of profitable firms, followed by wholesale financial markets, investment management, insurance intermediaries and brokers, retail lending and retail investments. Among the respondents, the greatest decrease in profitable firms between February and May/June was seen in the retail lending sector (10 percentage points) followed by payments and e-money (9 percentage points). The other four sectors saw a small increase in profitable firms between February and May/June: insurance intermediaries and brokers (2 percentage points), investment management (2 percentage points), wholesale financial markets (2 percentage points) and retail investments (1 percentage point).

Proportionately, retail lending had made most use of the available government support (49% of retail lending firms had furloughed staff and 36% had received a government backed loan), followed by insurance intermediaries and brokers (44% had furloughed staff and 19% had received a loan), retail investments (37% had furloughed staff and 15% had received a loan), payments and e-money (36% had furloughed staff and 11% had received a loan), wholesale financial markets (16% had furloughed staff and 11% had received a loan) and finally investment management (8% had furloughed staff and 3% had received a loan).

Mills added: "Our role isn’t to prevent firms failing. But where they do, we work to ensure this happens in an orderly way. By getting early visibility of potential financial distress in firms we can intervene faster so that risks are managed and consumers are adequately protected."

Reiterating the FCA’s own cautionary note on the preliminary nature of the findings, the Chartered Insurance Institute called for measured consideration of the figures.

“We must appreciate how well firms have done to weather successive storms of lockdowns, health and economic impacts and obviously the additional effect of people’s personal lives as well. The work our members have done in this period to maintain and even go beyond what they normally offer customers, should be commended,” said Keith Richards, chief membership officer of the CII.

“This survey was done before furlough was extended, which now gives employers financial support until the end of April and this time it can be taken flexibly. Firms can now furlough for as little as one day a week for example and this flexibility and guaranteed support could help firms bounce back better in coming weeks.

“At the time this survey was undertaken there were no vaccines in sight. The announcement of new vaccines has seen markets injected with a little optimism. The flip side to that however, is that it also took place before lockdown 3, which could cause greater damage, despite us feeling so close to an exit from measures to slow the spread of coronavirus.”

The Institute stressed the need for proactive risk mitigation at this time. “It is concerning that the FCA has determined 4,000 firms across three key areas are deemed at risk," Richards explained. "Also, I am surprised that there is no indication of a proactive plan to help mitigate possible failures during these unprecedented times. It is important to protect the interests of the consumers who may also be impacted as well as avoid further financial pressure being placed on the rest of the sector.”

Data for the report was requested of 23,000 solo-regulated firms and combined with using existing regulatory reporting data, enhanced data purchased from a third-party provider and in-depth analysis of liquidity for a number of the most significant firms. The surveys were sent out in two phases. Some 13,000 firms received the survey in early June; 10,000 firms in early August. Both surveys included the same questions. All firms surveyed are prudentially regulated by the FCA (solo-regulated firms). The analysis does not cover the 1,500 largest firms in the financial sector that are regulated for financial stability by the Prudential Regulation Authority.

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